Books on Romania
% of GDP
Update No: 112 - (26/09/06)
EU entry beckons in January
There are very good grounds for questioning the wisdom of the rush to admit
Romania, as also Bulgaria. Both are notorious for the scale of their crime and
corruption, which are Third World in character.
The process, however, now seems pretty unstoppable. So far 21 of the existing
members have ratified their accession, although one of the four that have not is
Germany, the most powerful player in the EU. It would be an extraordinary thing
for Berlin to insist on even a delay at this late stage. But Merkel has already
expressed opposition to the idea of Turkish adhesion.
The Romanians are likely to be rather nervous until the entry is an accomplished
fact in three months' time. Even then the exact terms of their membership are
still not wholly clear. Restrictions on the migration of their people are not
impossible even likely in certain quarters of the EU.
The conundrum of corruption
Corruption is the most often cited problem facing Romania. It infects the most
mundane of public services and the largest of public contracts. In distorts the
economy, twists the administration of justice and contributes significantly to
poverty by sapping public and private resources. It is, of course, demoralising
for the general public to know that their rulers and rich folk are a lot of
shysters and crooks.
In its quest to join the European Union, however, Romania pledged to confront
the problem. A government led by the centrist Alliance for Justice and Truth,
appears to be taking that pledge seriously. It must, however, pass some
important tests before it makes a substantial impact.
Since taking office in December 2004 Traian Basescu, the president, has
repeatedly urged police, prosecutors, regulators and judges to remove politics
from their work. "Institutions in Romania have a habit of looking to the
ruling party (for direction). What I say now is: 'Look at the law and act
accordingly'," he says.
The novel scourge of the scoundrels
The president surprised his own party and delighted rights groups by
appointing Monica Macovei as justice minister in February last year. Ms Macovei,
formerly head of the Romanian Association for the Defence of Human Rights, had
long called for anti-corruption measures and a more independent judiciary. One
generalization in corrupt countries is that women by and large in public life
are not corrupt, although many a wife must be turning a blind eye to their
husbands' chicanery so long as it brings home the bacon.
Ms Mcovei got the chance to implement "the reforms I was demanding when I
was on the other side of the barricades." In February, 2005 the government
lifted the immunity from prosecution privilege that former cabinet ministers
enjoyed. Concrete cases have also been launched. A former local leader for the
Social Democrats, the previous ruling party, was detained and charged with
alleged abuse of office and making false written statements.
In January, 2005 police opened a more important criminal investigation against
several executives at Rafo Onesti, an oil refining company. Officials say Rafo
evaded Euros 480m in taxes by selling petrol off the books to black market
distributors. The company has denied the charge. Calin Tariceanu, the prime
minister, says he wants a team of investigators experienced in tackling
corporate fraud, possibly from Britain, France or Germany, to help unravel the
layers of offshore companies and complex accounting the company has constructed,
in his view, to hide corruption.
According to Jonathan Scheele, head of the European Commission's delegation in
Bucharest, the government's handling of Rafo will be watched closely. "This
is a very important test case," he says. "It is important for the
business environment, for the new government's ability to collect taxes and for
fighting corruption." Dorel Sandor, a political analyst, agrees. He
believes success in prosecuting Rafo and a few other high-profile cases will
have enormous impact. "Basescu doesn't have to win a fight against 200
people, just 20. After that the market for corruption will be changed," he
The Bucharest Court was still investigating matter concerned with Rafo and a
business partner, Ovidiu Tender, in August this year.
Mr Tariceanu says his government will also review Euros 3.6bn worth of state
contracts with three large Western companies. The contracts are with Germany's
EADS to build a border security system for Euros 1bn, France's Vinci in a Euros
500m motorway construction project and with the US company Bechtel for a
separate Euros 2.1bn motorway project.
All three contracts were signed by the previous government, which used loopholes
in the public procurement law to award the contracts without competitive tender.
Mr Tariceanu has not accused any of the companies of corruption, but says the
prices involved are too high.
At the same time, however, diplomats are warning the new government not to turn
the anti-corruption drive into a political vendetta. Then there is the other
great issue - the 1989 revolution - that any Romanian government must address if
it wants genuinely to come clean with its citizens. Hundreds of millions of
dollars in state funds, mostly under the control of security services, are
believed to have vanished after the hasty execution of Nicolae Ceausescu.
But the mystery of the revolution is not only about money, it is also about the
truth surrounding the downfall of Ceausescu and the murky and violent transition
of power that followed. Most Romanians are convinced the full story has been
covered up by political, military and intelligence officials with secrets to
hide. Mr Basescu says he is willing to open up classified government files and
that much will be revealed in the coming months.
"For me it is very simple: Ask the state institutions to put the truth on
the table," he says. If they resist, Mr Basescu says he "will make it
very difficult for them." Asked why he can be trusted to when past
presidents have failed, he says "because I was not involved. I watched the
revolution on television."
It is a re-assuring fact that Romania's economy is booming again as it
prepares foe EU entry. After several years of deep recession in the 1990s,
Romania's economy has grown strongly in recent years. In 2004, it expanded by
8.3 per cent, while in 2005 growth slowed to 4.1 per cent due to floods which
cause widespread damage to agriculture.
It is expected to expand by more than seven percent in 2006, following strong
growth in the first two quarters, the head of the country's main statistics
agency said on September 8th.
"Looking at the signs from the first two quarters ... I am convinced that
it (Gross Domestic Product growth) will be over seven per cent," said
Vergil Voineagu, chairman of the National Statistics Institute. The institute
said the GDP expanded by 7.4 per cent in the first half of 2006 as compared with
the same period last year.
World Bank shows confidence in economy with RON bond launch
As a sign of confidence in the booming economy the World Bank issued a RON
bond launch on September 6th.
Officials said this is the first supranational issue in Romania under local law
and domestic clearing systems. It is yet another breakthrough for the Romanians
ahead of the big one in January.
Automobile Craiova to take majority stake from Daewoo
The Romanian car producer Automobile Craiova, in which the state owns 72.4 per
cent, is going to take over the majority stake from South Korea's Daewoo Motors
in the near future, Economy and Trade Minister, Codrut Seres, said recently, New
"Automobile Craiova will repurchase the 51 per cent stake from the Korean
party," Seres said. When the deal has been completed, Automobile Craiova
will own 100 per cent in Daewoo Craiova. Then the economy ministry can initiate
new privatisation procedures, the minister added. Daewoo Motor controls 51 per
cent in Daewoo Automobile Romania, while the remaining 49 per cent of the share
capital belongs to Automobile Craiova SA. South Korean President, Roh Moo
HyunPrior will pay a three-day visit to Romania, news reports said. The visits
are aimed to strengthen economic cooperation, Roh's office said.
OTP Bank invests 30m Euro in Romanian business
OTP Bank Nyrt, Hungary's largest financial company, is investing 30 million
Euro to expand its business in Romania, the bank said in a statement sent to the
Budapest Stock Exchange, New Europe reported.
The bank on June 23rd had already invested 20 million Euro in the unit to
upgrade its computer network and to increase the number of its branch offices in
The Budapest-based bank recently disclosed the latest investment in a statement
to the stock exchange.
OTP, Hungary's former banking monopoly, has spent US$2.4 billion to expand in
Eastern Europe in the past five years to mitigate a slowdown in revenue growth
at home because of competition from the likes of Austria's Erste Bank AG.
OTP bought the Romanian unit, then-named Robank SA, for US$47.5 million from the
UK's Balli Group in 2004. OTP also bought insurer Ceccar Romas SA in November
and is bidding for Casa de Economii si Consemnatiuni SA, Romania's largest
BRD invests 25m Euro in network
Banca Romana pentru Dezvoltare BRD-SocGen, the second-largest bank in Romanian
market, said recently in a statement that it has invested about 25m Euro in the
first six months of the year, with the bulk of the money going into the
expansion of its territorial network. This significant financial effort resulted
in the opening of 115 new branches, which brought the number of branches and
agencies operated by BRD to 441 at the end of June, the second-largest network
after that of CEC (Romanian Savings Bank) and slightly bigger than that of the
BCR (Romanian Commercial Bank).
As the network underwent an aggressive expansion policy, BRD also had to hire
personnel that would manage the new branches., In the first half, BRD had 5,723
employees, 1,311 (about a third) more than in June last year. The number of
branches has grown by 35 per cent since the beginning of the year alone. The
expansion of the bank's network led to an increase in the number of individual
clients to 1.8m in June, against 1.5m in the corresponding period of last year.
The aggressive expansion of the network led to an increase in expenditures,
which grew by 37 per cent against June, to 379m lei. Meanwhile, revenues grew by
15 per cent, to 749m lei. In the financial report, the bank's officials noted
that the increase in general expenses is a "natural consequence" of
the network's expansion. The bank's cost/income ratio - expressed as a ratio
between general expenditures and the net banking income - deteriorated against
June last year, increasing by 8 percentage points, to 50.6 per cent.
Fitch upgrades 4 Romanian banks on sovereign upgrade
Fitch Ratings upgraded on September 1 the ratings of four Romanian banks, after
it increased a day prior Romania's long-term foreign and local currency debt
ratings to its lowest investment grade level, the rating agency said, New Europe
Banca Comerciala Romania's (BCR) IDR is upgraded to BBB- from BB+, short-term
rating to F3 from B and the support rating to 2 from 3. These rating changes
result from the improved ability of the Romanian sovereign to provide support to
BCR in case of need, and reflect the importance of BCR to the Romanian banking
system, Fitch said. Banca Comerciala Ion Tiriac's (Banca Tiriac) IDR is upgraded
to A- form BBB+ and its support rating to 1 from 2, following the upgrade of the
country ceiling, Fitch said. The bank's Short-term rating is affirmed at F2 and
Individual rating at D. UniCredit Romania's (UCR) IDR is upgraded to A- from
BBB+ and its support rating to 1 from 2, following the upgrade of the country
ceiling. The banks short-term rating is affirmed at F2 and individual rating at
D. Banc Post's rating outlook is revised to positive, reflecting the positive
outlook on its majority owner EFG Eurobank's (rated A-) ratings and also that
the country ceiling is no longer a constraint.
National debt rating gets a Fitch upgrade
Fitch raised on August 31st Romania's long-term foreign and local currency debt
ratings to its lowest investment grade level, bringing it on par with India,
Croatia and Namibia. It also affirmed the country's short-term foreign currency
rating a level to F3. Fitch Ratings has upgraded Romania's foreign currency
issuer default rating (IDR) to BBB from BBB- and local currency IDR to BBB+ from
BBB, New Europe reported.
The outlooks on both IDRs remain stable. The country ceiling is upgraded to A-
from BBB+, Fitch said in an emailed statement. "Romania's sustained real
economic growth performance is narrowing the gap in living standards with the EU,"
Director in Fitch's emerging Europe Sovereigns team, Andrew Colquhoun, said. An
impressive pick-up in foreign direct investment is supporting the economy's
development and diversification."
Romania's convergence with richer European countries has been driven by
impressive real GDP growth, averaging 5.7 per cent per year between 2001 and
2005. Over the same period, FDI inflows averaged 4.7 per cent of GDP per year.
EU membership will bring structural aid of up to 17 billion Euro over 2007-2013,
equal to 19 per cent of 2006 GDP, and will underpin Romania's progress on
structural and institutional reform. Fitch expects Romania to join the EU on
schedule in 2007, although a one-year delay to 2008 would not negatively affect
the rating. Romania's public finances are a significant rating strength. The
government debt burden, of just 20 per cent of GDP at end-2005, compares with a
BBB range median of 34 per cent. Fitch expects the debt stock to fall further to
16 per cent of GDP by end-2006.
The modest fiscal loosening the authorities have announced for 2006, while
unhelpful in the context of efforts to restrain booming domestic demand, does
not imperil the sustainability of the public finances. The external finances
remain supportive of the rating. The external debt stock was 14 per cent of GDP
at end-2005, against a BBB range median of 19 per cent.
Following years of strong growth in international reserves, Romania was a net
public external creditor to the tune of 14 per cent of GDP at end-2005, compared
with a BBB range median net debit position of three per cent of GDP.
Encouragingly for a country running a high current account deficit, Romania's
liquidity ratio of 173 per cent at end-2005 was well above the BBB range median
of 136 per cent. The growing current account deficit - 8.7 per cent of GDP in
2005 - increases risks on the external side. But there is little sign that the
widening deficit reflects a lack of external competitiveness in the real
economy; the country's exports continue to grow faster than the median for
comparable economies in Eastern Europe.
The deficit continues to be funded largely through FDI, with 77 per cent
coverage in 2005. Credit to the private sector is growing strongly, rising 50
per cent in 2005 alone, but concerns on this score are eased as the increasingly
foreign-owned and relatively small banking sector (bank credit was just 20 per
cent of GDP at end-2005, compared with a median for comparable Eastern European
countries of 44 per cent) remains healthy on the main financial measures, the
report said. A key challenge for the authorities will be to lock in low
inflation to underpin the economy's competitiveness. Romania's adoption of
inflation targeting in 2005 has had an inauspicious start as the target was
narrowly missed in its first year of operation. "The economy's external
competitiveness and prospects for narrowing the trade deficit could be
undermined if higher inflation becomes entrenched through wage bargaining,"
Colquhoun said. The upgrade may help reduce borrowing costs for Romania's
biggest companies and make the country's economy more attractive to overseas
Rompetrol to invest US$30m for petrol stations
Rompetrol wants to spend up to US$30 million on 200 mobile gas stations to boost
its retail market share to 20 percent by the end of 2007, the company's director
general, Paul Pop, said on September 14th. Rompetrol currently has 15 per cent
market share with 92 COCO and 118 DOFO stations, New Europe reported.
Rompetrol's retail fuel sales jumped 39 per cent between June and August versus
the same period a year ago. The business model has several advantages.
With the mobile units, Rompetrol can enter small markets and still make a good
profit. Negotiating short-term leases for a site is faster than negotiating to
Also, mobile stations are rotated from location to location to gauge market
reaction, letting Rompetrol 'test drive' an area before committing to a bricks
and mortar station," analysts at investment bank Wood explained.
Rompetrol Downstream, the retail division of the Rompetrol group, plans to
double its gas station network to 500 units by the end of the year, opening 200
mobile stations, Pop said.
Rompetrol Downstream has a market share of approximately 15 per cent of the
retail market and plans to reach 20 per cent by the end of 2007. The company has
invested in the past five years about US$150 million in the gas station network
it operates in Romania. This year, Rompetrol Downstream estimates revenues of
US$685 million, a 37 per cent year-on-year increase.
Petrom's income up to 400 million Euro
Romanian petroleum company Petrom, which is controlled by Austrian OMV group,
recently reported a 1.42bn lei (403m Euro) net income for the first half of the
year, 2.3 times higher than in the corresponding period of 2005, the company
said in a statement. This came as a result of the fast-paced increase in the
price of oil worldwide and the rise in the amount of products sold, New Europe
Petrom CEO, Mariana Gheorghe, said that she hopes the company will improve its
results by the end of the year, but this depends on the volatility of the prices
on the international market. The company estimates a 520m Euro net income and
3bn Euro turnover. The exploration and production unit remains the Romanian
petroleum company's bonanza, generating a half-year EBITDA of 2.5bn lei (about
The refining unit witnessed contrasting fortunes, posting H1 operating losses of
407m lei (some 115m Euro). The losses of Petrom's refining division influenced
the results of the MOV group as well. The Austrians reported a net profit of 904
million Euro to the Vienna Stock Exchange. Petrom's personnel have been cut by
25 per cent over the past year to 38,136 employees. This was mainly because of
the introduction of a new system for operating filling stations, which takes the
related personnel out of the company's structure. Nonetheless, the results
posted by Petrom were lower than expected by some of the market's main analysts.
Competition lowers Romtelecom's net profit
Romtelecom, Romania's biggest telecom operator posted a 440 million Euro
turnover in the first half of 2006, down 5.9 per cent from the same interval in
2005, OTE Greek telecommunications group said in its recent financial report.
Romtelecom's net income reached 14.6 million Euro in the first half, 75.6 per
cent lower than in the same period of 2005, OTE Greek telecommunications group
said. "The telecommunications company is facing stronger competition, but
the delayed implementation of a new stage in the rebalancing process was another
factor behind the company's turnover decline," OTE CEO, Panagis Vourloumis,
said. In the first quarter of this year, Romtelecom reported total revenues
worth 222.8 million Euro, while net income stood at 18.8 million Euro, New
At the same time, the company ended the second quarter of the year with weaker
results - revenues worth 217.1 million Euro, down 9.2 per cent from the same
period of last year and net losses standing at 4.1 million Euro, a decrease from
the 46.8 million Euro net income posted in the second quarter of last year. The
operator's long-term debts shrank by 29 million Euro, while Romtelecom's cash
volume advanced by 42.5 per cent, to 224.4 million Euro. OTE explained
Romtelecom's revenue slide was due to the decline in the number of phone lines,
to 3.77 million, and to the diminishing traffic on the segment of individual and
legal entity subscribers (retail), amid the rising competition coming from cable
FOOD & DRINK
Greek companies invest 30m Euro in dairy sector
Greek companies, Tyras and Olympos, are set to invest 30m Euro in a joint
venture to build a dairy production plant in Romania in a bid to establish their
brands in the growing market, Ziarul Financiar daily reported recently.
The plant, which will be situated near the town of Brasov, towards the east of
the country, is expected to cover around 15 hectares and will be run under a new
company called Lactolymp.
According to a report in Ziarul Financiar.ro it is believed that the two
companies will use the plant as a base to introduce their products to the
domestic Romanian diary market. The move follows a similar investment by Tnuva
and Yoplait in 2004, where around 40m Euro was spent on building a dairy
production plant for the company's operations in the country. The Romanian dairy
industry, despite large-scale investment by companies like Yoplait and Danone,
still appears to favour smaller producers.
Research analyst Euromonitor stated: "Romania has negotiated with the EU a
quota of 3.3 billion litres of milk, out of which only a volume of
1.1-1.2billion litres is generally processed by the industry. The rest is
processed, consumed and sold by the small producers directly from the farm or in
opened markets." Heavy subsidies from the EU, as part of the Special
Accession Programme for Agriculture and Rural Development (SAPARD) and large
sales of unprocessed milk through smaller open markets are believed to account
Euromonitor believes that this high demand for domestic unpackaged goods, which
consumers deem to be fresher than imported packaged goods, has created "a
parallel market that affects legitimate sales of milk."
This "parallel" market is estimated to produce around two billion
litres of milk alone, which, according to the Association of Milk Producers,
dwarfs the current levels supplied by larger producers in the country. While
current Euromonitor estimates growth in the Romanian dairy industry at two to
three per cent a year, with further investment into smaller producers and the
packaged goods sector, it is believed the figure could rise to 10 to 15 per